Many business founders go into business with a partner (or partners) and set up a private company where each founder is a director and a shareholder. However, it is not uncommon for co-founders’ ideas and interests to diverge at some point. This can also occur in public companies which have many members and a large board of directors. This article unpacks the common issues and procedures surrounding how your company can appoint or remove a company director from office.

Key Steps

You need to take several steps to appoint or remove a director of your company. These can be broken down into three categories, including:

These aspects need to be complied with or the appointment or removal may not be fully effective or there could be fines. As directors of a company carry considerable control and responsibility, it is important that the company has met its requirements and maintains appropriate records. 

Governing Rules

Your company will need to comply with its own decision making requirements, which are usually contained in the shareholder agreement or your company constitution. These documents may include provisions concerning how to remove a company director from office. If you do not have either of these documents, then the replaceable rules in the Corporations Act will apply. 

The replaceable rules are rules set out under the law which apply to all companies, unless you override the rules in your shareholder agreement or constitution.

Appointing a Director

The replaceable rules allow: 

  • shareholders to appoint a director by passing an ordinary resolution (50% majority vote) at a general meeting; or 
  • the board of directors to appoint a director by the same 50% ordinary resolution. 

The company’s shareholders agreement or constitution may provide additional ways in which directors can be appointed. It is common to have additional rights for founders or certain shareholders to appoint a director on their behalf.

Removing a Director

There is also a replaceable rule that allows the shareholders to: 

  • remove a director by passing an ordinary resolution at a general meeting; and 
  • appoint a replacement director at the same time. 

A director of a company can also resign by providing the company with written notice

While a director is very important to the operation of the company, they cannot be locked into that position without the ability to leave the company. Therefore, it is important to have a couple of knowledgeable directors so that the company is left in capable hands if a director chooses to resign. From a decision-making perspective, it is also best to have an uneven number of directors, as this will avoid a deadlock on votes. 

Are There Other Ways to Remove a Director of a Public Company?

The company constitution may provide other valid mechanisms to remove a director. However, these mechanisms will only be valid if they do not conflict with the rules set out above in the Corporations Act. 

For example, there may be ‘self-executing’ provisions in a company constitution that dictate when a director is no longer eligible to hold office.

Public vs Private Company

The specific rules that you need to follow will depend on whether you are a private or public company. Private companies have the most flexibility when it comes to appointing or removing a director.

As a private company, the replaceable rules enable you to remove a director by a resolution of the company. However, if your company constitution has modified or replaced this rule, then you may be able to remove a director by other means. 

For example, the company may remove a director by a majority vote of the board of directors.

On the other hand, a public company can remove a director from office only by passing an ordinary resolution of shareholders. Unlike a private company, a public company can do so regardless of the company’s constitution or any agreement between the company, the director and its members. However, directors of a public company cannot remove a fellow director, only the shareholders can.

Meetings and Resolutions

The appointment or removal of directors, whether in accordance with the replaceable rules or your company’s shareholders agreement, can be done via a general meeting. 

To pass a resolution to remove a director from office, a notice of intention to pass this resolution must be given to the company at least two months before the meeting is scheduled to be held. After the company receives the notice, the company must then give the director a copy of the notice as soon as possible.

In response, this director has a right to put their case to the shareholders by providing a written statement and speaking at the meeting. The company must circulate this written statement to the shareholders.

Importantly, if a company does not follow these rules, it is a strict liability offence. This means that the company will be at fault regardless of whether the company intended to break these rules or was reckless or negligent.

Once you have issued this notice of intention, you must pass the resolution at a company meeting. The meeting must satisfy your company’s requirements, which will likely require:

  • properly convening the meeting with enough notice for shareholders, typically 21 days; and
  • satisfying the meeting attendance quorum.

You must pass the resolution by an ordinary majority, which requires that more than 50% of the shareholders of the company support the proposition to appoint or remove the director.

Therefore, a shareholder or shareholders who hold 51% or more of voting power can pass the resolution to remove another director, even if that other director does not want to be removed. In situations where there is a 50%/50% shareholders split, you should follow the dispute resolution procedure set out in the agreement to resolve the argument.

This vote must be logged in the company’s minute book and signed by the chairman of the meeting. It is also not essential for the shareholders to hold a physical or virtual meeting. They can also pass a circulating resolution, which is a document circulated and signed by all shareholders entitled to vote stating that they agree to pass the appointment or removal of a director.

Consent and Resignation

Once the decision to appoint a specific director has been approved by the company, that director must formally provide their consent to act as director in the form of a signed letter. This letter is called a “consent to act”. It is a simple document that is: 

  • signed by the director; and 
  • states that the individual provides their consent to act as director. 

This consent to act should also state that they have not been disqualified to act as a director. If the director is resigning on their own accord, they will need to provide a signed letter of registration to the company. If the shareholders or directors have the power to remove a director, then they can be removed by: 

  • the applicable vote at a general meeting; or 
  • signing a circulating resolution as discussed above. 

Updating ASIC

As part of the process of appointing or removing a director, you should update ASIC as to this change. 

If a director is resigning, they: 

  • can inform ASIC themselves; and
  • will need to provide a copy of the signed resignation letter. 

If this does not occur, your company will need to update ASIC within 28 days to avoid a late fee. This can be done via your ASIC Connect account, using your corporate key. You will need to insert:

  • your company details; and
  • the day the director was appointed or resigned.

Key Takeaways

Before taking any action to remove a director from office, you should consult your company’s governing documents such as: 

  • your constitution, 
  • the shareholder agreement; and 
  • the rules under the Corporations Act. 

It is important that your directors and shareholders understand how these processes work so that they do not violate their obligations. Importantly, the rules and requirements differ depending on whether the company is public or private. You need to make sure your company has properly documented this removal or appointment by passing the appropriate resolution. The director that you appoint must provide a signed consent to act. If they are resigning on their own, they will need to provide a signed resignation. Finally, your company will need to update ASIC within 28 days. If you need assistance appointing or removing a director, please contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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